Dagong Global Credit Rating Group Co., Ltd (hereinafter referred to as “Dagong”) released Dagong's 2017 Credit Outlook for the Global Insurance Industry On January 23rd, forecasting the trend of credit risks in ultra-low interest rate environment with rate hiked by US for global insurance industry in 2017.
Dagong believes that the extremely complex operating environment is characterized by an ultra-low interest rate intertwined with rate hikes by US Federal Reserve. Insurers’ profitability continues to be under pressure due to varying interest rate sensitivity; the rising of underwriting investment pressure, as well as other uncertainties such as investment risk appetite, have not yet decreased, thereby rendering insurer's capability to resist risks as weakening. Meanwhile, the already stressed global insurance industry will be further challenged due to the transformation of the European insurance market, which has been induced by Brexit's (the UK's exit from the EU) commencement in 2017, and an increasingly volatile global financial market suggestive of evidently escalating worldwide uncertainties.
The main analysis is shown below:
I. Global insurers’ credit risks will increase, although finding some variance, with rising global economic uncertainty and a prolonged ultra-low interest rate in 2017.
The prolonged low interest rates in developed countries, along with rising global economic uncertainty, will continue to push up global insurers’ credit risks in 2017. The prolonged low interest rates in developed countries, along with rising global economic uncertainty, will continue to push up global insurers’ credit risks in 2017. With the euro zone and Japan continuing their unconventional loose monetary policies, due to the lack of endogenous economic growth and domestic deflationary pressures. Meanwhile, the US Federal Reserve's accelerating rate hikes and developed countries will continue their comprehensive low interest rate policies, Meanwhile, emerging economies will continue to be the main driving force for the global insurance industry in 2017, furthermore, economic downturn pressure due to rate hikes by the US Federal Reserve, In addition, further structural reforms in China, as well as their own increasing political risks and declining anti-risk capability, which will increase policyholders’ prudence and result in insurers’ limited overall profitability, consequently increasing their credit risk.
II. The US Federal Reserve’s accelerating rate hikes along with improving domestic economic fundamentals help alleviate insurers’ credit risk, although the decreasing premiums render property insurers’ credit risks under pressure.
The continuing improvement in the US economy and the Federal Reserve’s progressive rate hikes will ease pressure upon insurers’ profitability to a certain extent, and life insurers’ credit risk will more noticeably decrease due to their significantly higher interest rate sensitivity in comparison with property insurers. US property insurers’ anti-risk capability is weak, although the underwriting performance with a limited premium rate will remain as the biggest threat to stable profitability in the future. Considering US property insurers’ abundant underwriting capacity in 2017, premium rate competition continues to be very intensive and premium rates are expected to decline in the future and perhaps accelerate their decline, in general, US property insurers’ credit risks will continue to be under pressure in the near future.
III. In an ultra-low interest rate environment, credit risk of the Japanese insurance industry will rise due to profitability pressure and the increase of liquidity risk.
In an ultra-low interest rate environment, credit risk of the insurance industry is expected to further accumulate due to impaired profitability. Constrained by the sluggish structural reformation, the Central Bank will continue imposing its ultra-easing monetary policy due to the lack of an endogenous economic growth momentum and deflation pressure. Seeing how Japan has entered the era of negative interest rates, Japanese life insurers attempt to progressively reduce the guaranteed rates of new policies, although under competitive pressure it is challenging for them to completely transfer the impact of negative interest rates to customers. Therefore, the profitability of Japanese life insurers will be squeezed, which is detrimental to its capital level. At the end, due to profit pressures, a rising investment risk appetite increases the credit risk of the industry as a whole
IV. Affected by the current low interest rate environment and political events, the UK's economy is experiencing great downward pressure, exposing insurers to increasing credit risk.
Affected by the prevailing macroeconomic downturn in developed economies and a low interest rate environment, The growth of insurance premiums of the insurance industry are expected to decline significantly, UK's insurance industry to increasing credit risk. Global economic uncertainty is rising and the financial market will affect British insurers’ investment income threat in credit risk. In recent years, British insurers have been forced to increase trust fund exposure which is mainly comprised up of stocks amidst a long-term low interest rate environment. Meanwhile, low interest rates in recent years have forced British insurers to increase the proportion of overseas asset allocation, given that market concerns concerning economic development following the UK's Brexit will again to force the British pound into a depreciation channel in 2017, and the rate hikes by the US alongside Chinese economic restructuring will increase global economic uncertainty.
V. Credit risk upon the Chinese insurance industry will increase in the short-term, while a higher industrial concentration ratio and tighter industrial regulation will contribute a promising improvement to its overall credit risk.
The expanding trend of vehicle insurance reformation and the slowing trend of vehicle sales will result in a negative impact upon the efficiency of coverage ability, threatening the possible credit risk of property insurance in the short-term, with the possibility of future amelioration. For life insurance, a higher proportion of universal insurance and a lower growth of premiums have raised the pressure of liquidity.By that time, life insurance companies will experience a co-existence of increasing liquidity risk and decreasing premium growth, and it remains possible for several small and medium-sized insurance companies to suffer from liquidity risk due to their high liability cost businesses. The prolonged low interest rate environment and increasing pressure upon provision will deteriorate the profitability of insurers. The short-term macroeconomic downturn will increase the credit risk of the insurance industry, within a controllable range.
VI. Subject to macro-economic downward pressure, credit environment of insurance industry in emerging countries will generally face deterioration risk.
Emerging countries will continue to be the main driving force of the global insurance industry growth in 2017, but deterioration of economy will challenge the credit quality in insurance industry. Insurance penetration is much lower in emerging countries than that in developed countries, and the insurance industry is more likely to dominate the market by lower price, loose underwriting standards and increasing marketing costs, premium growth will continue to outperform economy growth. The deepening adjustment of Chinese economic structure and the increasing interest rates of the Fed's will put pressure on merchandise trading and liquidity of international fund respectively, leading to unavoidable climbing credit risk in insurance industry. As Brazil and South Africa accounted for large regional market share, As a result, the overall credit risk in South Africa will increase to a certain extent.